Q1FY23 results: Pressure on IT services margins will continue, focus on outlook

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Amid fears of a likely recession in the United States and Europe and rising inflation around the world, first-quarter FY23 results in India’s IT services sector will be closely watched for management comments on demand outlook. With supply-side challenges yet to be resolved, margins will be under pressure due to higher retention costs and shifts. However, the silver lining might be a rupee down.

Indian IT services results will start coming in from July 8, with Tata Consultancy Services (TCS) being the first company to announce its figures. Infosys will be the last of the top four companies to share its results on July 24.

Analysts who follow the industry report that in their current commentaries, executives from leading and mid-cap IT services companies reiterated the robust demand environment due to cloud and digital transformation. However, many analysts now believe that the first signs of a shift in demand will be evident in the first quarter of FY23.

“While our recent discussions with executives indicate continued momentum in technology services spending, we expect early signs of impact in sectors like retail and manufacturing in 1QFY23,” said a report from computer insight by Mukul Garg and Raj Prakash Bhanushali of Motilal Oswal.

Analysts do not yet expect the companies to change their guidance forecasts, but the second half of FY23 and FY24 will have an impact. “Although the long-term demand environment remains unchanged, we expect an impact in S2FY23 and FY24 due to high inflation and economic slowdown in the US and Europe. We are reducing our EPS INR FY23 /FY24 by 2-5%, despite a positive impact of 300-400 basis points from a lower INR (79/USD),” the Motilal Oswal report states.

Infosys is expected to top the growth charts among top-tier lots, followed by TCS. Seasonal weakness and company-specific issues will impact HCL Technologies, Wipro and Tech Mahindra. Among mid-cap players, Mindtree and Persistent will continue to lead growth, according to reports.

While the focus will be on growth prospects, margins are expected to continue to be under pressure over the next two quarters before starting to normalize. Supply-side issues continue to plague businesses. Recent results from Accenture also showed that attrition is on an upward trajectory.

“Companies bear high talent retention costs (retention bonus, off-cycle salary review, etc.). The challenge exists, in India as well as locally. This pressure will seep into the margins; we expect a decline of 70 to 400 basis points year-on-year in the EBIT margin in our coverage universe,” said Kawaljeet Saluja and Sathishkumar S of Kotak Institutional Equity Research in their report.

They point out that the headwinds on the margins come in the form of salary revisions for Infosys, TCS and Tech Mahindra, higher travel costs and lower utilization as companies hire more new people.

Another area of ​​focus will be pricing. With supply-side concerns still looming, retention costs have risen significantly for businesses. For those expecting higher prices, the task could be difficult with global recession issues. “Securing the price increase in the second half could become difficult. For now, a more reasonable assumption will be stable pricing rather than price increases,” the Kotak report said.

If one is to take inspiration from Accenture, which recently announced its third quarter results, demand is strong, but some comments from management suggest a need to focus on growth and cost optimization .

BOX: What to watch out for:

– Management commentary on request

– Dynamic recruitment, good sign of demand

– Tendency to attrition

– Momentum deal or TCV signed

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